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Tax conformity bills set up possible showdown with governor

By: - January 23, 2019 4:56 pm

Sen. J.D. Mesnard, R-Chandler. Photo by Gage Skidmore | Wikimedia Commons/CC BY-SA 3.0

Two Republican lawmakers have introduced legislation that would compensate Arizonans for money they’ll lose if the state conforms with the federal tax code, but Gov. Doug Ducey hasn’t budged from his position that the money should be socked away for the next recession and budget crisis.

Sen. J.D. Mesnard, R-Chandler, and Rep. Ben Toma, R-Peoria, sponsored identical bills on tax conformity, and will soon introduce a second set of bills with a second option for how to avoid passing on the cost to Arizona taxpayers.

The 2017 federal tax cut and reform bill eliminated a host of itemized deductions from the federal tax code, and tax conformity would do the same at the state level.

The bills that Mesnard and Toma introduced Tuesday would fully conform with the federal tax law changes, which are estimated to cost taxpayers between $174 million and $228 million in the form of lost deductions. To offset the cost of those changes, the bills would reduce income tax rates by 0.11 percent. The Joint Legislative Budget Committee estimates the plan would reduce taxes by about $150 million, Mesnard said.

Mesnard said he and Toma’s second option will partially conform with the federal tax law, but will keep six “big-ticket” deductions in state law for the 2018 tax year. Those deductions include write-offs for interest on mortgage payments and for “miscellaneous expenses” such as unreimbursed business expenses and tax preparation services.

Both plans would only apply to the 2018 tax year. Mesnard said he believes the first proposal, which would offset the loss of deductions with lower income tax rates, is the quickest and easiest. Given that the Arizona Department of Revenue will begin issuing guidance forms for the tax season on Monday — the agency is instructing taxpayers to assume that Arizona fully conforms to the federal changes — Mesnard said that’s important. The Senate Finance Committee will hear that proposal on Monday.

“We wanted to put both on the table so that people have options,” Mesnard said.

The Ducey administration says the governor is committed to tax conformity. But Ducey wants to increase the state’s rainy day fund, which is a cash reserve for use during budget shortfalls, from $462 million to $1 billion, and he’s proposed using revenue from the first year of tax conformity for that purpose.

Patrick Ptak, a spokesman for the governor, said Ducey’s position hasn’t changed.

“The governor has been clear — we need to conform and any additional revenue should be put into the rainy day fund,” Ptak said on Wednesday.

Mesnard and other Republican lawmakers view full conformity as a tax increase and want to return the revenue it generates, including for the 2018 tax year, back to the taxpayers.

“If that’s their position, I hope they’ll reconsider,” Mesnard said of the governor’s plan.

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Jeremy Duda
Jeremy Duda

Jeremy Duda is a Phoenix native and began his career in journalism in 2003 after graduating from the University of Arizona. Jeremy Duda previously served as the Mirror's associate Editor. Prior to joining the Arizona Mirror, he worked at the Arizona Capitol Times, where he spent eight years covering the Governor's Office and two years as editor of the Yellow Sheet Report. Before that, he wrote for the Hobbs News-Sun of Hobbs, NM, and the Daily Herald of Provo, Utah. Jeremy is also the author of the history book “If This Be Treason: the American Rogues and Rebels Who Walked the Line Between Dissent and Betrayal.”